BBB Release: Understand The Risks Of Payday Loans

Published: August 4, 2010

Anchorage, Alaska – Aug. 3, 2010 – "Cash before payday" sounds nice and easy, but Better Business Bureau warns that payday loans can cost consumers, and even run them into debt, if they don't understand the risks.

Storefront lenders. The consumer writes a check to the lender for the desired borrowing amount, plus a fee. The lender gives the borrower the amount of the check, minus the fee. The lender then holds the borrower's check until the consumer's next payday, when the borrower can do one of three things: 1) allow the check to be cashed, 2) redeem it by paying cash to recover the loan plus a fee, 3) roll it over by paying the fee to extend the loan for two or more weeks.

Internet lenders. These work the same, but are applied for online. Funds are allocated through electronic fund transfers, which requires the consumer to provide a bank account number. The consumer is also sometimes asked to complete detailed applications asking for other personal information. This can put the consumer's identity at risk if the lender does not abide by strict privacy policies or fails to secure their website. Some internet lenders may be difficult to locate if a dispute arises; while some attempt to bypass state usury, licensing and consumer protection laws by residing in states with lax regulations or outside the U.S.

Understand costs. Under the Truth in Lending Act, payday loan costs must be disclosed in writing, including the finance charge and annual percentage rate. Finance charges range from $15 to $30 per $100 borrowed. This may not seem high but APRs average 300 percent, according to a credit industry survey.

Beware of "loan flipping." Sometimes a borrower, won't have enough funds to cover necessities and loan costs, but still writes a check for a payday loan. When payday comes and the borrower doesn't have enough money, a lender may use the check to coerce the consumer to extend their loan or some pay it by taking out a new payday loan. The consumer can fall into an endless cycle of repeated high-cost borrowing.

Before considering payday loans, the Federal Trade Commission and BBB serving Alaska, Oregon and Western Washington advise seeking other options:

1) Consider an advance on pay from your employer, or a small loan from a family member, friend, credit union or other lender.

2) Ask creditors for more time to pay bills. Find out what charges apply: Will there be a late charge, additional finance charge or higher interest rate?

3) For help developing a debt repayment plan or budget, contact a local consumer credit counseling service. These are often non-profits that charge little or no cost.

4) Get free BBB Reliability Reports on lenders and other businesses at www.bbb.org.